USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Assume that you observe the following prices in the T-Bill and Eurodollar futures markets

-Refer to Exhibit 15.5. If you expected the TED spread to widen over the next month, then an appropriate strategy would be to
A) go long T-Bill futures and long Eurodollar futures.
B) go short T-Bill futures and short Eurodollar futures.
C) go long T-Bill futures and short Eurodollar futures.
D) go short T-Bill futures and long Eurodollar futures.
E) None of these are correct.

Question

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Assume that you observe the following prices in the T-Bill and Eurodollar futures markets
 
-Refer to Exhibit 15.5. If you expected the TED spread to widen over the next month, then an appropriate strategy would be to
A) go long T-Bill futures and long Eurodollar futures. 
B) go short T-Bill futures and short Eurodollar futures. 
C) go long T-Bill futures and short Eurodollar futures. 
D) go short T-Bill futures and long Eurodollar futures. 
E) None of these are correct.

Quizplus · Accepted Answer

The TED spread is the difference between the interest rates on interbank loans and short-term U.S. government debt. A widening TED spread indicates increasing credit risk and/or liquidity issues in the banking system, leading to higher interest rates on interbank loans (Eurodollar rates) relative to U.S. T-Bills. To profit from a widening spread, one should go long on T-Bill futures (betting on falling interest rates or rising prices for T-Bills) and short Eurodollar futures (betting on rising interest rates or falling prices for Eurodollars).